• 58 mins The Dairy Industry Is Dying
  • 7 hours The Most Impressive Electric Vehicle Of The Year
  • 1 day Gold Miners Are Having A Stellar Second Half
  • 2 days How 3D Printing Is Turning Each And Every Industry On Its Head
  • 2 days Is The $3.5 Trillion Healthcare Industry About To Get Much More Transparent?
  • 3 days Gamblers Are Betting Big On Trump’s Impeachment
  • 3 days Even Banks Can't Answer Aramco's Trillion Dollar Question
  • 4 days Will Bezos Buy The Seattle Seahawks?
  • 4 days 6 Tech Trends Transforming The Travel Industry
  • 5 days Ousted Uber CEO Cashes Out $500 Million In Stock
  • 5 days Trump Prepares For Another Key Tariff Decision
  • 5 days The Free Money Bubble Is About To Burst
  • 6 days The Crushing Reality Of Poverty In America
  • 6 days Should You Buy Into The World’s Largest IPO?
  • 6 days The Infinite Possibilities Of Cosmic Energy
  • 7 days Analysts Link Walking To Economic Growth
  • 8 days Will Japan Turn Its Back On The Aramco IPO?
  • 9 days Global Debt Soars To $188 Trillion
  • 9 days The World's Largest Gold Miners Are Getting Creative
  • 10 days Twitter: The Saudi Spy Tool To Bring Down Dissidents
Is The Bull Market On Its Last Legs?

Is The Bull Market On Its Last Legs?

This aging bull market may…

Another Retail Giant Bites The Dust

Another Retail Giant Bites The Dust

Forever 21 filed for Chapter…

Zombie Foreclosures On The Rise In The U.S.

Zombie Foreclosures On The Rise In The U.S.

During the quarter there were…

John Rubino

John Rubino

John Rubino edits DollarCollapse.com and has authored or co-authored five books, including The Money Bubble: What To Do Before It Pops, Clean Money: Picking Winners…

Contact Author

  1. Home
  2. Markets
  3. Other

Markets Discover That Higher Interest Rates Are Bad

US stocks opened down hard today, in part because China released some truly horrendous trade numbers over the weekend, but also because the imminence of a US interest rate increase is starting to sink in. For anyone with rudimentary math skills, higher interest rates are a clear and present danger to what isnow a variable-rate (and therefore really fragile) world.

Last year, financial analyst David Templeton published a chart that illustrates one aspect of the problem:

Term structure US debt 2014

Note the surge in debt coming due in less than 5 years. Over the past decade the US has been borrowing short-term to take advantage of historically-low rates, thus minimizing its interest expense -- but at the cost of having to refinance several trillion dollars each year as its mountain of short-term paper matures. This is fine as long as rates stay low. But let rates rise, and each refinancing is at a higher rate and the government's total interest expense starts to soar. Templeton notes that "With the outstanding debt now totaling over $17 trillion, a one percentage point rise in interest rates equates to an additional $170 billion in interest payments on the outstanding debt."

The case can be made that since the Fed owns a big chunk of this paper, it can just forgive the interest, so no harm no foul. This is true for some but by no means all of the federal debt. And in any event, Washington represents just a tiny part of the variable rate world's balance sheet. Most other governments finance themselves in the same hope-and-pray fashion, and tens of trillions of dollars of commercial paper and other loans are linked to indexes like Libor, Euribor and the prime rate, all of which will rise with general interest rates.

Life, in short, gets harder for every segment of the borrowing community when short-term interest rates go up. And outside of the Fed's reality distortion field, life is already understood to be extremely hard. Greece is broke and getting broker as Middle East refugees flood its beaches. China's imports fell by 16% last month, implying that global trade -- especially in raw materials -- is cratering. Portugal is about to install a far-left, anti-austerity coalition government and its bond market is panicking. The US dollar is near its 12-month high, once again threatening to blow up that fabled $9 trillion of emerging market dollar-denominated debt. And Japan, which needs rising inflation to offset its soaring debt, is getting this instead:

Japan Inflation Rate

No surprise, then, that given a weekend to think things over, traders have decided to focus on the damage that higher rates will do to an already-fragile (or moribund) financial system. And since the event itself won't happen for another month, there's a lot of time to obsess.

 

Back to homepage

Leave a comment

Leave a comment